Housing Bubble

Tucson made Forbes’ list of the top 10 most overpriced cities in the United States for 2006 at #7. The list is based on the largest 112 metro areas in Forbes’ 2006 list of best places for business and careers, ranking them based on job growth, cost of living, housing affordability, and salaries. The ten most overpriced locations have the highest costs of living, lowest housing affordability, least job growth, and lowest salaries. 1. Essex County, Massachusetts 2. San Francisco, California 3. San Jose, California 4. Honolulu, Hawaii 5. Cambridge, Massachusetts 6. New York City, New York 7. Tucson, Arizona 8. Oakland, California 9. Boston, Massachusetts 10. Los Angeles, California

I plugged all the previous data into Excel and generated this graph: I wonder what happened in December and early January. The trend is amazingly linear, otherwise. When do we start considering Phoenix a buyer’s market? Now? When inventory hits 6oK? When the trend shows clear signs it has reversed? As I said in the comments to the previous housing inventory post, I think I want to start making lowball offers when I get back there!

It’s been a while since I gave an update on the number of homes for sale in Phoenix–the inventory has continued to balloon since the last report on March 10: 3/7/2006 36953 3/8/2006 37487 3/9/2006 37626 3/10/2006 37531 3/11/2006 38011 3/12/2006 38184 3/13/2006 38169 3/14/2006 38003 3/15/2006 38197 3/16/2006 38574 3/17/2006 38602 3/18/2006 39074 3/19/2006 38972 3/20/2006 38822 3/21/2006 39159 3/22/2006 38982 3/23/2006 39043 3/24/2006 39271 3/25/2006 39381 3/26/2006 39504 3/27/2006 39817 3/28/2006 39784 3/29/2006 39765 3/30/2006 39948 3/31/2006 40192 4/1/2006 40177 4/2/2006 40182 4/3/2006 40012 4/4/2006 40050 4/5/2006 40332 4/6/2006 40739 4/7/2006 40612 4/8/2006 41124 4/9/2006 41393 4/10/2006 41018 4/11/2006 42266 4/12/2006 42327 4/13/2006 42257 4/14/2006 42561 4/15/2006 42592 4/16/2006 42775 4/17/2006 42874 4/18/2006 42523 4/19/2006 42840 4/20/2006 43017 4/21/2006 43236 4/22/2006 43385 4/23/2006 43502 4/24/2006 43697 4/25/2006 43344 4/26/2006 43427 4/27/2006 44024 4/28/2006 43886 4/29/2006 44022 4/30/2006 44290 5/1/2006 44229 5/2/2006 43900 5/3/2006 43966 5/4/2006 44162 5/5/2006 44422 5/6/2006 44094 5/7/2006 44575 5/8/2006 44777 5/9/2006 44609 5/10/2006 44898 5/11/2006 45097 5/12/2006 45356 5/13/2006 45502 5/14/2006 45619 5/15/2006 45697 5/16/2006 45705 5/17/2006 45675 5/18/2006 46064 5/19/2006 46189 5/20/2006 46049 5/21/2006 46734 5/22/2006 46753 5/23/2006 46965 5/24/2006 46856 5/25/2006 47133 5/26/2006 47225 5/27/2006 47582 5/28/2006 47591 5/29/2006 47633 5/30/2006 47722 5/31/2006 47542 6/1/2006 47187 6/2/2006 47191 6/3/2006 47848 6/4/2006 47877 6/5/2006 47979 6/6/2006 48218 6/7/2006 48106 6/8/2006 48365 6/9/2006 48579 6/10/2006 48870 6/11/2006 48889 6/12/2006 49040 6/13/2006 49132 6/14/2006 49237 6/15/2006 49052 6/16/2006 49435 My first report, last October, showed an increase in inventory from 10,748 homes on July 20, 2005 to 19,254 on October 2. We’re now at a 459% increase in inventory in the just under 11 months. (But see Einzige’s comment on what counts as evidence of a housing bubble…) ...

To many, the housing bubble seems a foregone conclusion. Uncountable blogs devoted to the bubble give the impression that you must be crazy or stupid to not see it. In spite of this, I remain unconvinced. I’m not even sure I know what the “housing bubble” is. Here is a working definition: …that housing prices have been pushed well beyond any semblance of reasonableness and the dictates of healthy market fundamentals due to excessive liquidity, extremely relaxed lending standards, a speculative mania, and the increasingly irresponsible “cheerleading” of vested interests.Endless scary graphs, like this one, which shows Phoenix appreciation rates over the past 30 years, seem to bear this out. Nonetheless, I am left with questions. For example, who decides what price is “reasonable”? What standard should we use? Value is entirely subjective. Price, being a function of value plus ability to pay, can seem “unreasonable” to some, but “very reasonable” to others. The only one that matters, though, is the person who actually buys—and who, in so doing, reveals his opinion that the price is “reasonable.” Where is the evidence of a “speculative mania”? You can’t simply point to the recent rapid appreciation rates and say, “See?”, because that’s assuming what you’re trying to prove. What evidence I’ve seen for this has been sparse and unconvincing, so far. Of course I could be wrong, and we could be on the precipice of the largest housing price decline in history. Unfortunately we’ll only know in retrospect. The charge of “excessive liquidity” and “relaxed lending standards” also rings hollow to me. Now, it seems certain that the amount of borrowing taking place has increased significantly, but that could be caused by any number of things. Why does this automatically mean that lenders have become “extremely relaxed” with their money—which I presume means they’ve suddenly become willing to lend to any fiscally irresponsible idiot, as long as he has a heartbeat? This seems a testable hypothesis to me. If such an explanation were true, wouldn’t you expect to see foreclosure actions increase over time, as the bad debtors began defaulting on their loans? When debtors default on their loans, lenders need to provide public notice of the impending sale of the property. These notices get recorded at the county recorders office, usually in the form of a Notice of Trustee’s Sale. In order for a lender to record a Notice of Trustee’s Sale, a borrower has to be at least 90 days late on her mortgage payments. Luckily, Maricopa County makes these records easy to obtain. This graph shows data I’ve compiled from the Maricopa County Recorders office. The blue line is the number of Notices of Trustee’s Sales per month, over the past 11 years. The dotted red line is a 3-month moving average. What does this graph tell us? My first impression is that it’s easy to see evidence of the 2001 tech bubble, but, if anything, Maricopa County seems to have recovered from that, as the average number of notices has returned to 1996ish levels. Admittedly this one graph is hardly a death-blow to the idea of the bubble, but I believe it’s important to take note of it, if for nothing else, then at least as a caution against our tendency to succumb to Chicken-Littleism and confirmation bias. ...

The last few years have seen a lot of creative financing to purchase homes as prices rose out of control, with a huge increase in the percentage of adjustable rate mortgages (ARMs) used by first-time home buyers in order to stretch the limits of what they could afford to buy. About 25% of all current mortgages in the U.S. are ARMs. Unfortunately, many of those who got them did not understand what they were signing up for, and one in five subprime ARM homeowners in West Virginia, Alabama, Michigan, Missouri, and Tennessee was more than 30 days late with a payment at the end of last year. The peak of ARM interest-rate resets will occur in 2007-2008, which leads one researcher to predict that up to 1 million of 7.7 million homeowners who took out ARMs in the last two years will end up losing their homes to foreclosure in the next five years, with banking losses of up to $100 billion–painful, but less than the S&L crisis. The last time interest-only ARMs were popular was in the 1920’s, when the fall of home prices caused many of those who had them to lose their homes. In the last few years, they’ve been pushed hard by sleazy mortgage lenders with things like illegal telemarketing calls and deceptive direct mail pieces that look like they’re something important from your current lender, a refund check, or something else highly desirable or urgent in order to get you to open it. More at Ben Jones’ Housing Bubble Blog.

The number of homes for sale has gone over 40,000 (at last check it was 37,217 on March 6). Home builders are offering incentives like a free car or free upgrades (like granite counters, flooring, and cabinets) in order to avoid reducing prices, but price reductions are inevitable. And when price reductions occur, those who’ve already signed contracts at higher prices will be more likely to walk away… the rational response when an asset class you want to buy is deflating in price is to wait as long as possible, because the deals will only get better. (That’s why I’m content to live with year-or-more-old computer technology; my last upgrade for a home system was to buy somebody else’s used system.) More at Ben Jones’ Housing Bubble Blog.

Not only are there 33,270 homes for sale in Phoenix, 14,601 of them are currently vacant. Many speculators purchased homes and never lived in them so that they could be resold in “new” condition. The average price of homes listed for sale is $484,594. The number of pending sales is 8,125. The average price of the pending sale homes is $378,573. (From Ben Jones’ Housing Bubble Blog.) Lippard (2006-12-09): Forgot to link to previous #'s:/2006/01/phoenix-housing-inventories-for-sale.htmlAnd the ziprealty numbers for Phoenix listings are higher (continuing from where the previous left off):1/31/2006 32,5632/1/2006 32,6842/2/2006 33,0872/3/2006 33,1452/4/2006 32,9532/5/2006 33,3682/6/2006 33,5762/7/2006 33,5502/8/2006 33,6842/9/2006 33,8442/10/2006 34,2342/11/2006 34,5882/12/2006 34,7532/13/2006 34,8152/14/2006 34,8152/15/2006 34,8162/16/2006 34,8162/17/2006 35,1442/18/2006 35,4272/19/2006 36,2602/20/2006 35,4432/21/2006 35,6422/22/2006 35,5032/23/2006 35,3242/24/2006 35,1782/25/2006 36,3882/26/2006 36,5242/27/2006 36,6392/28/2006 36,1743/1/2006 36,3893/2/2006 36,2833/3/2006 36,8113/4/2006 36,9003/5/2006 37,0643/6/2006 37,217 ...

What an amazing city. The Ixtapaluca low-income housing projects (one photo at left) look like a suburban nightmare out of a video game, but these purport to be actual photos taken from a helicopter. (Thanks to BLDGBLOG.) Historical Comments Einzige (2006-12-09): Santa Vaca! That looks literally unreal. Martin (2006-12-09): Those aren't houses! More like storage units for surplus humans. Brrrr. ...

To continue from just before where we left off last time… there were 10,748 homes for sale on July 20, 2005, and it had increased by 79% to 19,254 by October 2. Yesterday, it was up a further 69% to 32,512–a 202% increase over the July 20 number. I’ve seen estimates that about a third are being sold by “investors." 10/1/2005 19333 10/2/2005 19316 10/3/2005 19362 10/4/2005 19463 10/5/2005 19562 10/6/2005 19670 10/7/2005 20052 10/8/2005 20219 10/9/2005 20153 10/10/2005 20324 10/11/2005 20470 10/12/2005 20668 10/13/2005 20850 10/14/2005 21238 10/15/2005 21446 10/16/2005 21463 10/17/2005 21527 10/18/2005 21588 10/19/2005 21795 10/20/2005 21806 10/21/2005 22302 10/22/2005 22719 10/23/2005 22769 10/24/2005 22806 10/25/2005 22976 10/26/2005 23132 10/27/2005 23293 10/28/2005 23681 10/29/2005 23805 10/30/2005 23816 10/31/2005 23790 11/1/2005 23601 11/2/2005 23665 11/3/2005 24193 11/4/2005 24579 11/5/2005 24786 11/6/2005 24717 11/7/2005 24937 11/8/2005 25244 11/9/2005 25333 11/10/2005 25387 11/11/2005 25700 11/12/2005 25685 11/13/2005 25773 11/14/2005 25945 11/15/2005 25913 11/16/2005 25884 11/17/2005 26261 11/18/2005 26098 11/19/2005 26662 11/20/2005 26688 11/21/2005 26684 11/22/2005 26488 11/23/2005 26776 11/24/2005 26819 11/25/2005 26855 11/26/2005 26871 11/27/2005 26890 11/28/2005 26979 11/29/2005 26811 11/30/2005 26797 12/1/2005 26792 12/2/2005 26915 12/3/2005 27238 12/4/2005 27295 12/5/2005 27356 12/6/2005 27387 12/7/2005 27403 12/8/2005 27367 12/9/2005 27649 12/10/2005 27706 12/11/2005 27664 12/12/2005 27512 12/13/2005 27411 12/14/2005 27566 12/15/2005 27517 12/16/2005 27603 12/17/2005 27791 12/18/2005 27776 12/19/2005 27722 12/20/2005 27604 12/21/2005 27554 12/22/2005 27516 12/23/2005 27486 12/24/2005 27311 12/25/2005 27014 12/26/2005 26810 12/27/2005 26822 12/28/2005 26687 12/29/2005 26649 12/30/2005 26547 12/31/2005 26497 1/1/2006 26462 1/2/2006 26401 1/3/2006 26751 1/4/2006 27403 1/5/2006 27564 1/6/2006 28224 1/7/2006 28337 1/8/2006 28542 1/9/2006 28595 1/10/2006 28786 1/11/2006 29222 1/12/2006 29507 1/13/2006 29689 1/14/2006 29899 1/15/2006 30415 1/16/2006 30391 1/17/2006 30707 1/18/2006 30817 1/19/2006 31085 1/20/2006 31457 1/21/2006 31463 1/22/2006 31497 1/23/2006 31607 1/24/2006 31766 1/25/2006 31830 1/26/2006 32142 1/27/2006 32002 1/28/2006 32477 1/29/2006 32458 1/30/2006 32512 ...

Over the next two years, $2.5 trillion in U.S. mortgages that are based on adjustable rate mortgages will reset to higher interest rates. There is little question that many people who have been using creative financing to speculate in the real estate market are going to have some serious financial difficulties as a result. More at Ben Jones’ Housing Bubble blog.